The Reserve Bank board this week confirmed it’s still open to further monetary policy easing, although as we had expected, prospects for a third consecutive rate cut in August have fallen.
It’s helpful to compare the wording in the June and July minutes.
In a shift from the prior month, the minutes of the July monetary policy meeting, released this week, dropped the very strong sentence that “members agreed that it was more likely than not that a further easing in monetary policy would be appropriate in the period ahead”.
Furthermore, while the board will “continue to monitor developments in the labour market closely, and adjust monetary policy if needed”, the “if needed” qualification is new.
Finally, when central banks decide to pause, they often refer back to previous policy decisions and in the final paragraph of the minutes the board notes “this decision, together with the reduction in the cash rate decided at the previous meeting, would assist in reducing spare capacity in the economy”.
The Board is clearly prepared to move and probably expects to move again but prefers to wait a while to assess the impact of the first two cuts.
On May 24, we complemented our February call for two rate cuts in the second half of 2019 with the likelihood of a third cut.
With our forecasts for growth, inflation and the unemployment rate clearly pointing to the need for further stimulus, we remain comfortable with our call that the next move will be in November.
However, the labour market remains the most immediate priority for the RBA, and with updates to conditions being provided on a monthly basis, prospects for the next move being as early as September or October cannot be dismissed.
Beyond that, an important factor would be the capacity of banks to channel any more rate cuts through to consumers.
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